A "Chewable" Poison Pill?

By Peter Galuszka

Updated on: June 25, 2008 / 4:39 PM
/ MoneyWatch

Remember the scene in the movie "M*A*S*H*" when Painless the dentist decides to commit suicide by downing the poisonous "Black Capsule?" Following a Last Supper-style scene with his cronies and some tender nursing care, however, Painless comes back to life.

Well, that's sort of what what Harvard Law School Professor Lucian Bebchukwants to do with so-called "poison pills" that became popular in the 1980s to ward off unwanted leveraged buyouts (LBOs) by corporate raiders. Bebchuk is pushing a "chewable" pill that would have limits applied.

Poison pills can take a number of forms. One of them, called a "shareholder rights plan" has a trigger that would automatically issue shareholders new shares of stock and thus dilute the shares the would-be suitor has. Doing so makes it more expensive to conjure up a takeover. Other variants include stock swaps, refunds and schemes to stagger the terms of directors. The pills were invented by Martin Lipton, a lawyer with Wachtell, Lipton, Rosen & Katz in 1982.

As time passed and days of the LBO raiders faded, some managements used poison pills to prevent shareholder revolts. Activists claim that some firms have used the pills to avoid change and keep incompetent CEOs in power.

Bebchuk's idea would be to keep the pills but make them "chewable" by having shareholders affirm them from time to time. Companies including Disney, Bristol-Meyers-Squibb and CVS have adopted the idea.

Not everyone appreciates Bebchuk's effort. Pill inventor Lipton, for instance, thinks that such tinkering will give shareholders too much power at the expense of boards and will be a nuisance.